AEGEANCAPITAL

WEEKLY COMMENTARY Q4-2000

"End Of The Week Market Update" for week ending 12-29-00
The action of the market this past week, really did not reveal much about its true intentions. Volume was generally light, and the the action was influenced by end of the year window dressing, and shameful attempts to "mark up" holdings by mutual fund managers the rally in second tier stocks on Thursday) However, we have made several positive observations, which may not translate into anything positive in the very short-term, but we believe they will in the intermediate term. First of all, we noted last week that a positive divergence had developed -with regards to the SP500- between price and the oscillators. Price had made a lower low but the oscillators had made a higher low, the divergence was confirmed when price followed the oscillator higher (we had 5 consecutive days of advances in the SP500) At the present time the SP500 is a bit overbought, and the NYSE is also overbought as measured by the McClellan Oscillator which had a reading of 170.33 on Thursday (the highest in five months) In addition the a/d line for the NYSE appears to have completed a complex bottom. So, although we may get a pullback, in the short-term, the SP500 looks very healthy and it should resume its upside action. On the other hand, NASDAQ is more ambiguous. At Friday's close it is sitting right in the middle of its downtrend channel (upper band at 2850, lower band at 2050) It should be noted that despite the price deterioration on Friday, advancers were ahead of decliners, which should be construed as positive. In addition, sentiment over the past two weeks has deteriorated, with the AAII reporting a large drop in the percentage of bulls from 59.6% to 31.1% -which from our contrarian point of view it is positive- On top of that, one must consider the possibility that the FED may lower rates sooner than its end of the month meeting, which should provide lot's of fuel for a sustainable advance. Moreover, we strongly believe that if NASDAQ flirted with violating the 2000 level, the FED will act to prop up the market no matter what. In conclusion, we think in the short-term the markets can go either way, with the FED acting as the catalyst for any upside resolution. If the markets deteriorate this week, we think it will probably be the last leg down of the decline that started in September.

"End Of The Week Market Update" for week ending 12-22-00
Last week, we said that if we might get a third leg down, but usually that is the last one. NASDAQ came within 70 points from the downside target that our forecasting model had projected on November 12 (see Nov. Newsletter) If you recall, that target was 2250 (+/- 75 points), so now the question is "IS THE BEAR DONE FOR NOW?" Maybe it is, but there is no evidence yet to support any assertion that indeed the "third wave down" has ran its course. Take a look at the NASDAQ chart below, as you see the index has not even broken above the downtrend line that has been in effect since September. Until, it is broken, the downtrend is still in place. Look for the 2800-2850 level as the critical resistance level, if NASDAQ stumbles there badly, then 2000 maybe the next stop! However, keep in mind that the FED could lower rates before its next meeting. Such a generous gesture, will lift the market up with a vengeance! The chart below is an illustration of what would have to happen in order for the downtrend to be broken. THE CHART IS ONLY AN ILLUSTRATION, IT IS NOT A PROJECTION) The picture is a little better for the SP500. Although, it too, has yet to break above its downtrend resistance line, an encouraging positive divergence has emerged between the price action and the action in the 20 day oscillator. The price has recorded lower lows, but the oscillator is making higher lows! That is encouraging, because, that kind of positive divergence is a leading indicator that precedes any change in the current trend. WE WOULD LIKE TO WISH EVERYBODY HAPPY HOLIDAYS.

"End Of The Week Market Update" for week ending 12-15-00

For many investors this past week was probably a bitter disappointment! However, you must keep in mind, that NASDAQ had already rallied 20% from its November lows, while at the same time the fundamental elements that have brought the market down, are still around in full force. As we have said several times, the reasons for this steep decline have to do with unrealistically high expectations being adjusted downward to meet the realities of a slowing economy/corporate earnings. In many of our newsletters, as well as, our market updates we have stressed over and over that technology is cyclical, and anybody who tells you otherwise, is either naive, or, plain dishonest. In order for the market to turn around, the perception about the future of the economy has to turn around. Next week the FED is meeting, the expectation is that, it will change its bias to neutral. There is no doubt that the FED will do at least that. The question is this: is it going to be enough to change investors' perception, or, are investors going to be disappointed because the FED ONLY changed its bias and did not lower rates at the same time? We suspect that if the FED just changes the bias -without lowering rates- we may get a short-lived rally, but then misery will set in again. On the other hand, if the FED actually lowers rates, then we are looking at a different picture altogether. The market should rally on a sustainable basis. We think that the probability of the FED actually lowering rates at this time is less than 30%, but it is not zero, which means it could happen. From a technical point of view, if you look at the 20 day aggregate oscillators for both NASDAQ and the SP500, they are at the middle of their range, meaning, in the short and intermediate term the market can go either way, depending upon the catalyst that it gets over the next few days. More importantly, take a look at the momentum chart for the A/D line for NASDAQ. Clearly you can see that so far we have had two "legs" down and two "failed rallies" It appears that we are just starting a third leg down. Whether it materializes , or, not has to do with what the FED does on Tuesday. The good news is this, if indeed, we get a third leg down, usually that is the last one! We would expect a sustainable rally to take place for several weeks. In our newsletter, we mentioned that we expected the market to be a bit rough maybe for another 2 weeks, but after that, we should breath easier. The market may not give the "end of the year rally" that everybody has come to expect-as their birth-given right!- but after the first of the year, it should begin to act much more positive. So, be patient for a couple of weeks, and if things get worse just remember that the "darkest dark is right before the dawn" That is the reason why in our managed accounts we have been mainly in cash (just doing short term trades) patiently waiting for things to turn around. We believe they will, but it may not happen until early next year.

"End Of The Week Market Update" for week ending 12-1-00

In our daily commentary for Friday 12-1-00 (see daily market updates) we predicted that traders would not want to be either short or long over the weekend (ourselves included) As it turned out, that is exactly what happened. Early in the day, short sellers closed their positions bidding prices up and driving the market higher, then traders who went long yesterday (like ourselves) closed their positions (driving prices down as they were selling) In other words, the market both on Thursday and Friday, was driven by short-term traders, thus, investors should not read much into it. In order to get a better picture for the near and intermediate term future, we would like to review how our forecasting model has performed over the past 90 days. If you recall, when NASDAQ was at 4200 it gave a target price of 3650, then when that target was reached, it projected 3250, when that target was reached it projected 2950, when that target was reached it projected 2475. We came very close to 2475, and now we see a downside projection of 1250 for the SP500, and 2250 for NASDAQ. Whether these levels are achieved or not is irrelevant. This is what is relevant: for 90 days every time the markets reached a support level, the model indicated that the support will not hold, and it did not. The question is WHY? Here is the reason why: technicals DO NOT hold when the fundamentals of a market (or a stock) have changed. In an efficient market, the technicals confirm the fundamentals, and vice versa. Since, the fundamental picture of the economy -and that one of corporate earnings- has changed, the market is moving to match the new fundamentals without any regards to previous "technical support levels" So, when is this going to change? It will change, when the perception among investors with regards to the economy and earnings changes. Investors, over the next two-six weeks, will have a few good reasons to change their perception. We believe that a) the election fiasco will be resolved one way or another, b) the FED will either change its bias in December, and or lower rates in January, c) most of the lower earnings expectations will be fully priced into stocks if the markets move another 15%-20% lower. Therefore, within the next 2-6 weeks, the fundamental picture will begin to change, the technical picture will then also change in order to match the new perception, and at that point we will get a sustainable rally. Until, that happens, we do not expect very much progress. We believe traders will have opportunities to make money -over the next 2-6 weeks- but intermediate and long term investors, may find the climate rather difficult. On another note, if you recall (see daily updates) on 11-12-00 we raised a warning flag with regards to the fiber optic sector. If the market continues to decline over the next 2-6 weeks the emphasis on IF) the fiber optic and networking sector will suffer proportionally worse than the rest of technology, because they still pose unrealistically high P/Es. The same holds true for biotech! Finally, in our managed accounts we closed our position in BHH at $21 (we bought Thur. at 19.5 see daily updates)

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"End Of The Week Market Update" for week ending 11-24-00

The catalyst we spoke about last week, still remains elusive. However, there are a couple of things that we view as positive for the market. A) In our November Newsletter, we made a case that if NASDAQ fell to 2750 and it found support there, then the index would have set up some very credible positive divergences see newsletter) NASDAQ did bounce off the 2750 level. The question is whether the rally holds next week. If it does (the emphasis on IF) then the positive divergences will in fact be validated. At this point, we believe the best approach is to wait until next week to see if the rally that started on Friday, holds. If it does not then we could easily see NASDAQ at 2450-2500 and SP500 below 1275.

"End Of The Week Market Update" for week ending 11-17-00

This past week, the markets, again, had to deal with lower future earnings expectations, downgrades, outright negative earnings, an unwavering FED, fears about a hard landing, and of course the farcical soap-opera over the outcome of the elections! In the face of all these adversities, the SP500 was roughly up 2%, while NASDAQ was roughly down 2%. A rather soporific performance, if one is looking at just the numbers. However, under the surface there is an explosion in the making. We believe, last week, we saw the calm before the storm. The market is looking for a catalyst to break away either on the upside or on the downside. For example, our regression model gives an almost equal probability for NASDAQ to reach either 3650, or, 2475 over the next 5-15 trading days! We believe investors should be equally prepared for either event. Technically speaking, the current numbers for trend, sentiment and momentum, in the past 10 years, have resulted in violent resolutions (nearly 40% of the time bullish, and nearly 40% of the time bearish) We expect the same to take place again. The catalyst(s) the markets are looking for to act upon, can be anything, although more likely will be related to the outcome of the election. For example, if over the next 2-3 days the fiasco is finally over, the markets could very well use the opportunity to explode on the upside. On the other hand, if it looks that the fight will be carried over to the U.S. Supreme Court, then the markets could very well explode on the downside. Friday morning, investors got a taste of both possible events. When the Lower Court Judge announced his ruling (that would have finalized the results, and more likely would have resulted in a Bush victory) the markets, briefly advanced sharply. Then when traders realized that after all the ordeal was not over yet, they drove the markets down. Under the surface there are lot's of powerful conflicting forces that can pull the markets one way or another, with just a little bit of help from outside. On the positive side, there are several positive divergences (as we pointed out in our newsletter) between price and momentum. On the other hand, the trend still remains negative, and also sentiment is too bullish. According to the sentiment figures released last week by AAII, the percentage of bullish investors stood at 65%. That is as high as it was in early September when NASDAQ was at 4200! From a contrarian point of view, such overblown bullishness can be dangerous. A positive exogenous event can cause people to stampede into the market driving it higher. At the same time, a negative exogenous event, can decimate the optimism of the bulls and cause them to throw in the towel and stampede out of the market, driving prices down. Be prepare for either event, and have a plan of action ready to implement in either case.

"End Of The Week Market Update" for week ending 11-3-00

This past week NASDAQ played catch-up with the SP500 and the Dow. Our model continues to be positive but it is getting close to flashing a "neutral signal" which usually is a transition signal before a major change in direction takes place in the markets. As you can see from the two probability scenarios produced by our short-term forecasting model, the ratio between the probability of the bearish scenario and the probability of the bullish scenario is around 1.7 and it has been coming down for the past 3 three trading days. It should be noted that a) the Dow is up against the previous support (which now is resistance) line running from the Oct. 98 and Oct. 99 lows, b) the SP500 is up against its 200 day MAVG, and also it is up against the previous support line (which now is resistance) running from the Oct. 99, April '00 and May '00 lows, c) NASDAQ is up against the previous support level (which now is resistance) running from the Oct. 99 and May '00 lows. Consequently, the markets can either break above these resistance levels, then come down to re-test them, and move higher if the re-test is successful, OR, they may not be able to overcome these resistance levels, and they may experience a sharp post-election sell-off before they make another sustainable up-side run. We are employing very tight "stops" on all long positions we open in our managed accounts until the picture becomes more convincingly bullish.

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"End Of The Week Market Update" for week ending 10-27-00

This past week the inevitable finally happened! The "untouchables" (aqua JNPR,CIEN,NEWP,GLW etc) were stripped of their status as "safe heavens" In several instances, we pointed out that regarding any stock that is trading at stratospheric P/E as a "safe heaven" -while the rest of the market is moving lower- is silly. DO NOT BELIEVE THE EXECS OF THESE COMPANIES TELLING YOU THAT BUSINESS WILL NOT SLOW DOWN IN THE FIRST QUARTER. Companies such GLW that insist growth will continue at present levels, will have to eat their words in January and the price of the stock will suffer even more. Anyway, we do not really mean to offend anybody so, we will move on with what we see as "positive" First of all, we would like to point out the pronounced positive divergence -see chart below- between actual price behavior and price momentum for NASDAQ. As you can see clearly, NASDAQ has turned the corner. That does not mean NASDAQ will move straight up from here. Our forecasting model is predicting choppy price movement for BOTH SP500 and NASDAQ over the next ten trading days. Our interpretation of the readings that we are getting from our indicators, is that the markets are forming a "complex" bottom which will result in an upside break-out within the next 10-15 trading days, or, b) the downside action will extend until the end of the year, taking NASDAQ possibly below 2500 and maybe 2250.